PNB v. Andrada Electric and Engineering Co.

GR No. 142936
April 17, 2002
Panganiban, J.

PETITIONER: Philippine National Bank & National Sugar Development Corporation

RESPONDENT: Andrada Electric & Engineering Company

DOCTRINE: Basic is the rule that a corporation has a legal personality distinct and separate
from the persons and entities owning it. The corporate veil may be lifted only if it has been used
to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or
perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired
ownership or management of some assets of the Pampanga Sugar Mill (PASUMIL), which had
earlier been foreclosed and purchased at the resulting public auction by the Development Bank
of the Philippines (DBP), will not make PNB liable for the PASUMIL's contractual debts to
respondent.
FACTS:
 Respondent (plaintiff) Andrada Electric and Engineering Co. (Andrada) alleged that it is
a partnership duly organized, existing, and operating under the laws of the Philippines,
with office and principal place of business at Quezon City.
 Pampanga Sugar Mills (PASUMIL), is a corporation organized, existing and operating
under the 1975 laws of the Philippines, and had its business office before 1975 at Del
Carmen, Floridablanca, Pampanga
 Andrada is engaged in the business of general construction for the repairs and/or
construction of different kinds of machineries and buildings.
 On August 26, 1975, the defendant PNB acquired the assets of the defendant PASUMIL
that were earlier foreclosed by the Development Bank of the Philippines (DBP) under
LOI No. 311.
 PNB organized the defendant NASUDECO in September, 1975, to take ownership and
possession of the assets and ultimately to nationalize and consolidate its interest in other
PNB controlled sugar mills.
 Prior to October 29, 1971, the defendant PASUMIL engaged the services of plaintiff for
electrical rewinding and repair, most of which were partially paid by the defendant
PASUMIL, leaving several unpaid accounts with the plaintiff;
 Andrada and the defendant PASUMIL entered into a contract for Andrada to perform the
construction of electrical works, to perform extra work such as providing electrical
equipment and spare parts.
 Out of the total obligation of P777,263.80, the defendant PASUMIL had paid only
P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to P527,263.80.
 Out of said unpaid balance of P527,263.80, the defendant PASUMIL made a partial
payment to the plaintiff of P14,000.00, in broken amounts, covering the period from
January 5, 1974 up to May 23, 1974, leaving an unpaid balance of P513,263.80.
 PASUMIL and PNB, and now NASUDECO, failed and refused to pay the plaintiff their
just, valid and demandable obligation.
  The President of the NASUDECO is also the Vice-President of the PNB, and Andrada
besought this official to pay the outstanding obligation of the defendant PASUMIL,
inasmuch as the defendant PNB and NASUDECO now owned and possessed the assets
of the defendant PASUMIL, and these defendants all benefited from the works, and the
electrical, as well as the engineering and repairs, performed by the plaintiff.
 PNB sought to dismiss the case claiming that:
o is not a party to the contract
o the alleged services rendered by the plaintiff to the defendant PASUMIL upon
which plaintiff's suit is erected, was rendered long before PNB took possession of
the assets of the defendant PASUMIL under LOI No. 189-A.
o the PNB take-over of the assets of the defendant PASUMIL under LOI 189-A
was solely for the purpose of reconditioning the sugar central so that PASUMIL
may resume its operations in time for the 1974-75 milling season
o nothing in the said LOI No. 189-A, as well as in LOI No. 311, authorized or
directed PNB to assume the corporate obligation/s of PASUMIL
o at most, what was granted to PNB in this respect was the authority to 'make a
study of and submit recommendation on the problems concerning the claims of
PASUMIL creditors,' under LOI No. 311.
RTC: ruled in favor of Andrada and against PNB, NASUDECO, and PASUMIL
The RTC ordered PNB, NASUDECO, and PASUMIL to pay jointly and severally P513,623.80
to Andrada as well as attorney’s fees and costs.
CA: affirmed RTC ruling
The CA affirmed the RTC’s ruling. CA held that it was offensive to the basic tenets of justice
and equity for a corporation to take over and operate the business of another corporation, while
disavowing or repudiating any responsibility, obligation or liability arising therefrom.
ISSUE: W/N petitioner PNB is liable for unpaid debts of PASUMIL to respondent Andrada? –
NO.
HELD: NO, petitioner PNB is NOT liable for unpaid debts of PASUMIL to respondent Andrada
considering that there was NO merger or consolidation with respect to PASUMIL and PNB.
 Respondent Andrada claims that petitioners should be held liable for the unpaid
obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly
authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners
contend that their takeover of the operations of PASUMIL did not involve any corporate
merger or consolidation, because the latter had never lost its separate identity as a
corporation.
 A consolidation is the union of two or more existing entities to form a new entity called
the consolidated corporation. A merger, on the other hand, is a union whereby one or
more existing corporations are absorbed by another corporation that survives and
continues the combined business.
 The merger, however, does not become effective upon the mere agreement of the
constituent corporations. Since a merger or consolidation involves fundamental changes
in the corporation, as well as in the rights of stockholders and creditors, there must be an
 express provision of law authorizing them. For a valid merger or consolidation, the
approval by the Securities and Exchange Commission (SEC) of the articles of merger or
consolidation is required. These articles must likewise be duly approved by a majority of
the respective stockholders of the constituent corporations.
 In the case at bar, we hold that there is NO merger or consolidation with respect to
PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation Code
was NOT followed.
 In fact, PASUMIL’s corporate existence, as correctly found by the CA, had not been
legally extinguished or terminated. Further, prior to PNB's acquisition of the foreclosed
assets, PASUMIL had previously made partial payments to respondent for the former's
obligation in the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid
P250,000 to respondent and, from January 5, 1974 to May 23, 1974, another P14,000.
 Neither did petitioner PNB expressly or impliedly agree to assume the debt of PASUMIL
to respondent. LOI No. 11 explicitly provides that PNB shall study and submit
recommendations on the claims of PASUMIL's creditors. Clearly, the corporate
separateness between PASUMIL and PNB remains, despite respondent's insistence to the
contrary.
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No
pronouncement as to costs.